10 questions to Ask/Answer when Buying or Selling a Business
By Dennis Zink
May 4, 2020
If you had to sell your business tomorrow, how would it fair? How can you know the way your business is positioned in the market? What follows are 10 important questions you should ask when buying or selling a business.
These Questions to ask when Buying or Selling a Business include variables that a prospective buyer would consider when evaluating your business as a target acquisition. The final score is a combination of market, management and product metrics that will help define the appeal your business could have to potential buyers. Using a 1 to 5 scoring system, where 5 is excellent and 1 is poor, you can use your best judgment to self-score your business in these areas.
Don’t be discouraged with a low score. Do use this as an opportunity to take corrective action.
Score values: 0 – Beyond poor; 1 – Poor; 2 – Fair; 3 – Good; 4 – Very good; 5 – Excellent.
- Product mix – How many products or services does your business offer? If your company is a one-trick pony, give yourself 1 point. If you have a diverse product mix, score whatever you think best represents your product mix up to a maximum of 5 points. A prospective buyer will appreciate a diverse product mix. Having more products or services to sell gives the customer more options to buy. In this instance, more is generally better, although too many products and services could be confusing.
Product differentiation from your competitors is important. What makes you different?
- Customer mix – If you have one or perhaps just a few income sources and your business would be decimated by the loss of that customer or customers, score one point. If you have many revenue streams, score 2 to 5 points. You never want to have your business dependent on only a few customers, because losing that customer/revenue source could result in your company’s demise. Diversity is good here.
- Business and industry trends – If your business has been trending downward, score 1 point. If you are more than 15 percent behind last year’s sales, score minus 1. If your sales are trending up strongly, perhaps a 4 or 5 makes sense. Now for your industry trend score. If your industry is collapsing, score 1 point. If you are in a fast-growth industry, perhaps a 5 is your score.
Add these two — your business and your industry scores — and then divide that sum by two to give you a composite trend score.
- Receivables and collections – If you have a problem with aging accounts receivable, score 1 point. If you have no past-due accounts or you get paid either upfront or upon sale, score 5 points.
- Size – If you have one operating unit that is doing above-average business for your industry, score 3 points. If you have many operating units and you’re killing it, score 5 points. Size is an important variable but it’s not a be-all and end-all metric. Size usually lessens the risk to a potential buyer. But a smaller business with greater profits might be viewed as more appealing.
- Geographic penetration – If you have only one location or if your business is coming from a limited geographical area and your penetration is weak, score 1 point. If your business is well established in the market and your penetration is greater than your competitors’, score 5.
- Management – If you do everything yourself, score 1 point. If you never have to be involved in the day-to-day aspects of running your business and it is running smoothly, give yourself 5 points. A strong management team is very important to a buyer. Chances are good that a buyer will not want to retain your “consulting” services for more than three months to a year after you are bought out.
- Quality of your financials – If your financial statements would hold up to an audit, give yourself 4 points. If you don’t have financial statements, give yourself a zero. Audited statements earn a 5 here.
- Management Information Systems – If you have state-of-the-art computer software that provides virtually all the information you need to run your business effectively, give yourself a 4 or 5. If you are using pencil and paper, you get 1 point.
- Profitability – If your company is losing money, give yourself a zero. If profits are minimal, then score 1 point. If profits are outstanding and increasing year-to-year, then give yourself 5 points. A business will not remain in business without profits. Of course, you want to include owner benefits in this metric.
- Total – Tally your points in these 10 categories and see how close you are to a perfect 50. A company with a high score has the potential to attract sound buyers and maximize equity in a sale. A business with a low score will not be an exciting target for an acquirer and may sell for break-up value, discounted inventory value, little to no goodwill, or may not sell at all.
The areas where you are relatively weak, where you scored less than 3 points, should warrant your attention. Areas in which you scored less than 2 should be addressed immediately. Areas in which you scored 0 or 1 should be reviewed this week. If you scored less than 30 total points across all 10 areas, I suggest that you contact me at email@example.com
I can help you improve your business viability, business value and your score.